Q3 Update

2020 has been a remarkably odd time to be an investor. Granted, it has been an incredibly strange time to be alive in general. It is now October and Covid continues to rage on, a seemingly never ending storm without respite. Our President just tested positive for the virus and has entered the hospital. He has the best medical care and will therefore almost assuredly be fine, but you never know. The word has been used over and over, but that is because it rings true, these are unprecedented times. I think we would all like to just get this chapter over and move on with our lives. With an election right around the corner however, I expect more volatility to be on the horizon. I’m not one to make market forecasts, but I would not be surprised to see some pretty big swings in the near future.

Q3 Performance

As of 10/1/2020, my 10K portfolio stood at $13,047.01. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 10/1/2020 the SPY had a price of $334.89. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculations.

	10K Return(1)	SPY Return(2)	Difference(1-2)
2018(8/19-12/31)	(13.95)	(13.71)	(.24)
2019	37.33	32.6	4.73
2020(1/1-9/30)	10.41	5.32	5.09
Since Inception(8/19/18)	30.47	21.85	8.62

As we can see, I have done reasonably well in both 2020 and overall. I am by no means crushing the index, but a steady outperformance compounded over years can grow into a massive delta. If I can keep beating the S&P by 4-5% a year, I will be thrilled. So far, my GARP strategy has worked. I hope my portfolio keeps up the momentum, but don’t be surprised to see some reversion to the mean.

My stocks are now worth $12,778.29 and I am sitting on an additional $268.72 of cash, meaning I am almost fully invested. The market does appear to be frothy in my opinion, but in general I like to have my money invested rather than sitting on the sidelines. Should the market fall, I expect my companies to make intelligent capital allocation decisions, coming in the form of share buybacks or acquisitions of target companies at lower prices.

BUYS

INTC– I saw someone on Twitter(I would give credit, but I don’t remember who) mention that Intel shares looked attractive given current prices. I decided to take a look and based on numbers alone I liked what I saw. Problem was, the semiconductor industry was well outside of my circle of competence. I then went on to do a mini deep dive and educate myself. Admittedly, I will never be a semiconductor expert, far from it. But I think I have learned enough to be able to assess the competitive dynamics, time will tell if I am right or wrong.

So why the Intel discount, what’s the rub? Intel has been perceived to be in a losing CPU race against smaller faster competitors, AMD and Nvidia. They have the advantage of being fabless, in other words they do not manufacture chips themselves. Rather they design the chips and outsource manufacturing, mostly to TSMC, the Taiwanese semiconductor giant. TSMC brings fantastic technology to the table, enabling the smaller competitors to leapfrog over Intel in ultra high performance technology. This perception very well may be correct, but I feel it fails to paint the full picture. Intel is now so diversified that they are no longer completely reliant on the microprocessor. The second quarter of 2020 marked the first time that the data center portion of the business overtook the CPU portion, accounting for 52% of overall revenue. Data centric revenue was up 34% YoY. Certainly doesn’t look like a company on the brink of death to me.

Intel likely did take their eye off the ball and let competitors catch up in areas they previously held complete dominance. While Intel used to be a microprocessor company, they now are involved in so many different lines of business. Their focus has shifted to data, which they estimate to have a total TAM of $230 billion by 2030 according to this past quarter’s earnings transcript. This is significantly higher than the PC market TAM and Intel has therefore made it into the priority.

At the end of the day, Intel is still an incredible business that spins off loads of cash that can then be reinvested back into the business. In 2019, they spent 16.2B on CapEx and an additional 13.3B on R&D. That is 29.9B being spent on innovation and improvement, almost 3x what Nvidia and 5x what AMD did in total 2019 revenue. Intel trades at around 13x expected 2020 FCF, a deep discount to the rest of the market. I expect the company to continue to make use of their vast resources to invest in the future. Simultaneously, they will continue to pay out increasing dividends, make accretive acquisitions and opportunistically buyback shares.

CBOE- This one is a little less controversial and much less discussed on the Twitter-sphere. CBOE, which started as the Chicago Board Options Exchange but now goes by CBOE Global Markets, operates as a market maker, creating a marketplace for options and futures as well as a global stock exchange. It is a brilliant business model, they take none of the risk, but rather create the rails for others to work on. They exhibit classic GARP characteristics that I like to see, high return on invested capital and a capital light business. The business requires very little reinvestment, which allows the company to use their cash flow elsewhere. In 2019, they generated operating cash flow of $632 million. CapEx for the year was a mere $35 million. This left just under $600 million to be used in value creating activities. For instance in 2017, CBOE made a $3.2 billion acquisition of BATS Global Markets that has really bolstered the company. Since then, top line, bottom line and FCF have all grown considerably. I expect more large acquisitions in the future.

There is actually a whole group of companies working within this greater marketplace industry that exhibit superior economics. Just some examples are CME, Intercontinental Exchange and Market Axess. I happen to like CBOE the most at the moment given current prices, but they are all great companies. Should an opportunity come available, I could see myself owning one or more of these companies in the future. I’m actually surprised I have never seen Warren Buffett play in this sandbox. Seems to be right up his alley, but he has his reasons.

As always, I would like to thank you for taking the time out of your day to give this a read! Feel free to leave some comments or questions. Follow me on Twitter @TheGarpInvestor.

Q2 Update

Count me as one who did not expect the market to come roaring back in the second quarter. I cannot quite claim to understand why the market has been so exuberant, but euphoria reigns supreme. Coronavirus case numbers are surging, major companies are being forced into bankruptcy and yet, the stock market continues to rise.

I see economic struggle everyday within my family business. We are commercial real estate landlords and many of our tenants are facing tough times. Some have been closed for months, unable to pay their rent. Others will probably have to shut down their businesses never to return. This is our new reality.

I truly hope things will recover, but we should all be preparing ourselves for any eventuality. You don’t have to think too hard to come up with some truly dire situations that could arise. I’ll spare you all the doom and gloom, but I have envisioned quite a few. Should certain events happen, calamity could ripple through the economy and really shock the financial world. Let’s pray I’m just being overly dramatic and none of these events come to pass.

Q2 Performance

As of 7/1/2020, my 10K portfolio stood at $12,478.91. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 7/1/2020 the SPY had a price of $308.36. The SPY has also given out $9.78 in dividends since I started tracking, so I have accounted for that as well.

10K Return(1) SPY Return(2) Difference(1-2)

2018(8/19-12/31) (13.95) (13.71) (.24)

2019 37.33 32.6 4.73

2020(1/1-6/30) 5.59 (3.03) 8.62

Since Inception(8/19/18) 24.79 11.6 13.19

As we can see, I have actually had a very strong 2020. In particular, most of the outperformance came within the second quarter. At the end of Q1, I was only beating SPY by 2.01% on the year. That delta has since grown to 8.62%. Given everything going on in the world, I’ll take it.

Screenshot 2020-07-02 at 11.22.27 AM

We can see my stocks are now worth $10,343.63 and I am sitting on an additional $2,135.28 of cash. This means the cash portion of the account now comprises 17.11% of the portfolio. I was uncharacteristically busy with my transactions this quarter, the state of Covid-19 and the corresponding effect it has on the economy really has me spooked. I therefore unloaded a few of my holdings. For the time being that money will just be waiting on the sidelines, I am not seeing many buying opportunities out there.

Buys

EGHSF– I purchased shares of Enghouse Systems in early June after the company reported their latest quarterly earnings. Enghouse is a vertical market software company not much unlike my largest holding, Constellation software. I purchased 30 shares for a total of $1,459. Enghouse has just come off an incredible quarter. Year over year, they increased revenue by 50%, net income by 63.8% and cash flows from operation by 72.5%. I don’t think I even need to say much more than that.

Sells

HEI and LUV– I decided to liquidate all of my holdings in any company competing in the travel industry. They very well may recover and I might end up missing out on some gains, but I would rather take the risk off the table. These are times that we really have never seen before. It is incredibly hard to predict how this will all play out. Heico and Southwest are both strong reputable companies. They will likely make it through to the other side, but I’d rather put my money in companies that don’t have to struggle through this crisis. Most of my other companies are operating from positions of strength.

FND and ULTA– I have also decided to sell out of my two big box retail companies. Floor and Decor saw a surge in the stock price and my confidence in the business began to wane. I don’t know where the economy will go, but I’m not sure a company looking to open up hundreds of more big box stores is where I want my money. Now that I’ve sold, I’m sure the price will double. I’ll live with those consequences. Coronavirus has really impacted Ulta’s business. As you can imagine, when no one is leaving the house, the need for beauty products has fallen to near zero. I expect their business to struggle for as long as the virus lasts. For that reason, I think my money can be put in better places.

As always, thank you all for reading! You can follow me on Twitter @TheGarpInvestor.

Updating The Watchlist

I’m not sure about the rest of you, but I have found myself with an abundance of time on my hands. I have spent the last couple of months quarantined to the house and much of my normal business work has been put on hold. I am not married and don’t have any kids, so let’s just say I have nothing but time. Watching Netflix and playing video games can only get me so far, so I figured I should at least be somewhat productive.

I have dedicated at least an hour or two every day to investment research. Some days I have done far more than that, while others have gone completely wasted. What I can I say? I am human. Whether it is running screens, glancing through company financial statements, or reading 10Ks and quarterly transcripts, I have found the last couple of months to be the perfect time to learn.

Now is also an opportune time to update my company watchlist. I’m not sure what the next few months or even years will hold, but I am trying to get myself ready. Recently many of us tuned in to watch the Berkshire Hathaway annual meeting. Berkshire is now sitting on a record level of cash, over $130 billion. Buffett remarked that he wants to be prepared for any financial situation. Things could return to normal in a matter of weeks, but the Covid-19 numbers could spike and businesses could be forced to close for months further. If that should happen, economic calamity will ensue and I would assume that markets will drop into free fall. I want to have a list of companies ready to go for such a buying opportunity. I want to emphasize that this is not a prediction, but rather I am doing my best boy scout impersonation by being prepared.

The first companies on a watch list should always be ones you already own. These are companies you have studied and had the conviction to buy. Many variables have likely changed since the initial purchase, but that’s where research should begin. Check one by one and see how the businesses have performed. Have revenues and profits risen or fallen in recent quarters? Has their balance sheet held up, or have they taken on additional debt? Think into the future and consider where the obstacles might lie and whether they are still in a position to grow. Finally, when you have a good grasp on the business, look at the price. If the business scenario looks bright and the stock price is below your purchase price, that business is likely a good candidate for buying more. Conversely, if business conditions appear dour and the stock price has risen, you have a good indicator that it may be time to sell.

Aside from companies I have already invested in, I have compiled a short list of companies I am watching closely:

Comcast (CMCSA)- Look we all know them and if you are anything like me, you probably hate them. They may have terrible customer service, but that doesn’t change the fact that they are a phenomenal business. The cord cutting revolution was probably overblown, but it has been interesting to follow. As less people order cable, Comcast has simply raised prices on internet services. They are essentially an unregulated monopoly on a vital product. They are a cash machine, churning out a whopping 13 or 14 billion dollars of free cash in 2019 depending on how exactly how you measure it.

After a rather steep decline in the stock’s price, my interest has been piqued. Let’s be conservative and use the lower number 13. Comcast now trades at 12.5x 2019 FCF, a very reasonable number. Much like Disney, we know the business will be adversely affected by the virus, they have been forced to close all Universal theme parks, a big money maker for the company, that comes along with high fixed costs. My real hesitancy however is the amount of debt the company holds on their balance sheet. Over 100 billion in debt and 180 billion in total liabilities. I need to dig in more before I would feel comfortable making an investment.

Copart (CPRT)- I just finished reading Junk to Gold: From Salvage to the World’s Largest Online Auto Auction, the story of Willis Johnson, founder of Copart. I encourage you all to pick up a copy, I thought it was a great short read. The book depicted his rise from humble beginnings to Copart’s domination of the auto salvage business. What started as just a tiny scrap yard has turned into the world’s largest auto auction business. It is a classic rags to riches story. Johnson is a tremendous entrepreneur and has a penchant for finding opportunities to make money in any situation.

Today, the company sits in a great position. Their financials look better every single year. In my opinion they are probably a bit expensive at current prices, but Copart will remain on my radar. They have a solid balance sheet and produce a fair amount of free cash. They reinvest that cash back into the business, which has allowed them to grow immensely.

Intel (INTC)- Intel is probably the company I am most interested at the current moment. It is a company you have probably all heard of, but may not actually know what they do. I understood what they did at a cursory level, but never did a deep dive until this quarantine began. I thought the semiconductor industry would be too difficult to understand, so I just skipped over it entirely. After taking a brief look through their financials however, I couldn’t push it off any longer.

Intel is the world’s largest designer and manufacturer of semiconductor chips used in virtually all computing equipment. Though they are known for their microprocessors, they design chips for a range of products from mobile phones to the self driving car. I admittedly will never understand the technical minutia of the industry, but I think I can at least understand the competitive dynamics and why Intel has been so successful.

Intel is the gorilla in the fight. With a market cap of around 260 billion and sales of over 70 billion in 2019, Intel is the major player in the US. To put that in context, their main American competitors, AMD and NVIDIA had sales of 6.7 billion and 10.9 billion respectively. In 2019 alone, Intel spent 13.3 billion on R&D and another 16.2 billion on CapEx. That means they spent just under 30 billion bettering their competitive advantage, all while spitting out over 15 billion in free cash flow. AMD and NVDA have found footholds in successful niches, but catching up to Intel in the overall market is incredibly tough. Intel just has so many more resources at their disposal. The company actually faces much tougher competition from companies outside the US. Samsung and TSMC are great companies in their own rights, but do somewhat different things. I’m not going to go too deep into this today, but know I am watching Intel very closely for now.

Medifast (MED)- As someone who was born and raised in Baltimore, I have a sweet spot for any local company. Medifast is one of the few public companies still located within city borders, so I like to check in on them. With a renewed focus, Medifast has grown quickly these last few years. Revenue has grown over 2.5x over the last 5 years. Their financials look very strong, the company holds zero dollars of debt on their balance sheet. Any company able to grow quickly without having to take on a single dollar of debt is impressive in my book.

I am a little cautious about investing in this company however. I wouldn’t go as far as calling Medifast a pyramid scheme, but at first glance I would say they have pyramid like tendencies. Most of Medifast’s growth has come from the Optavia brand. Optavia is a multi level marketing company selling weight loss products. Their model works through having members sign up as coaches, who then make money selling products to other members. Perhaps this is all just a clever marketing scheme, but it sounds a bit fishy to me. Unless I can understand what differentiates Optavia from a pyramid scheme, I’ll be staying away.

As always, thank you all for taking the time to read! I hope you take some time and update your watchlist. If you find any companies I might be interested in, please send them my way. You can follow me on Twitter @TheGarpInvestor.

Q1 Update

Well that was a doozy! We just finished the quarter in what has easily been the scariest investing environment I have ever faced. In fact, it has probably been the most frightening time for any investor, young or old. Unfortunately, the situation we all face isn’t close to being over. I don’t know how long this will last, nor do I know how devastating the consequences will be. The best we can do is hold strong and remain ever vigilant waiting ready for opportunities.

As for my own investing performance… it has been rather putrid. I have scolded myself many times in the last few weeks for not keeping more cash on the sidelines. This was a rookie mistake and I own up to it. I just personally hate sitting on cash, I enjoy owning partial shares of some of the world’s greatest businesses. Cash can’t compound, it sits idly losing value due to inflation. It does however provide a lifeline should an opportunity come knocking. If there is no cash available, you either have to watch it go by or tap into a margin balance, which I personally refuse to do.

While the future looks grim, now is not the time to panic. These kinds of events are what separate novices from those who outperform. This crisis will shuffle money from the know nothing investor, to those who have done their homework. It will expose those who made use of excess amounts of leverage and those who bet on companies that lack durable competitive advantages. As Warren Buffett put it “You don’t know who’s swimming naked until the tide pulls in.” Everyone looks great during a bull market, it is only when the bear roars that the score is settled. This can be applied not only to investors, but to companies as well. Some are prepared for these kinds of situations and can prosper, others will be forced into bankruptcy.

For that reason, I try and invest into companies that perform well in all economic conditions, feast or famine. A strong balance sheet is imperative. It is hard to go broke if you don’t owe any money. Cash is king and I prefer companies acting like a dragon sitting on a hoard of gold, protecting that cash at all costs. You can bet a company such as Berkshire Hathaway won’t be filing chapter 11 and instead will be using this occurrence as an entry point into outstanding businesses.

Q1 Performance

As of 4/1/2020, my 10K portfolio stood at $9,700.23. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 4/1/2020 the SPY had a price of $257.75. The SPY has also given out $8.44 in dividends since I started tracking, so I have accounted for that as well.

10K Return(1) SPY Return(2) Difference(1-2)

2018(8/19-12/31) (13.95) (13.71) (.24)

2019 37.33 32.6 4.73

2020(1/1-3/31) (17.91) (19.92) 2.01

Since Inception(8/19/18) (2.99) (6.62) 3.63

As you can see, I have actually beaten the S&P since the inception of this account, albeit I have done so while still losing money. I therefore find no sense of accomplishment in this feat. If the S&P was to fall 50% over a 10 year period while my own account only fell by 35%, I’m not going to be happy. The ultimate point is to make money, not just outperform an index.

Current Portfolio

Here is an updated look at my portfolio as of 3/31/20

Screenshot 2020-04-07 at 5.50.41 PM

We can see I have $9,652.61 invested and have an additional $47.62 in cash. I made some changes to my portfolio this quarter, time will tell if any of these were good ideas.

Buys

CNSWF- I invested into Constellation Software, which has immediately become my largest holding. The company acquires small companies that provide vertical market software to niche customers such as dentists, fitness centers and hospitals. They serve customers in virtually every market you can think of. They own hundreds of businesses and have extremely high customer retention. Constellation is a company I have followed for years and given a large fall, I became a happy buyer. Of course right after purchasing, the stock continued to plummet. I could have gotten a much better price, so be it. They are run by Mark Leonard, a brilliant capital allocator with an amazing beard. I have great confidence holding this company indefinitely.

HEI.A- I also bought shares of Heico corporation. They have a dual class structure, so I bought into the A shares, seeing that they traded at a discount to the standard shares. They offer only 1/10th the voting power, but given how small a position I hold, I find this to be immaterial. Heico is a niche supplier of airplane parts. They are a fantastic company that has fallen greatly due to the decimation of the travel market. While I was initially thrilled by the drop in price, I may have acted in haste, not fully appreciating how long the impact of the virus will last. I will continue to monitor the situation, but am considering getting out. I don’t like quick in and outs, but sometimes you can get lured in on false hope. The travel market might be impacted for years to come, I’m hoping that is not the case but who knows at this point. If people aren’t flying, planes won’t need new or replacement parts. Even a great business with a pristine balance sheet can get into trouble if sales fall off a cliff for years.

Sell

BKNG- For the very reason I am considering selling out of Heico, I have already sold out of my position in Booking Holdings. They are a fabulous company, but the impact of the virus on their business is immense. They make their money selling hotel rooms, car rentals and airline tickets. It is a brilliant business model, they take on none of the heavy lifting and merely act as an agent. As long as this pandemic lasts however, their entire business has essentially been cut to 0. They have a strong balance sheet and smart management, so I have no doubt they will weather the storm. I just can’t predict how this will impact their bottom line and for how long. I wouldn’t be surprised if I one day get back into the company. I’m not comfortable holding them right now, but that won’t always be the case.

Hold???

LUV- I haven’t made a decision on Southwest yet. Just like the last two companies I discussed, Southwest’s business has been crushed by this pandemic. I am loath to get out of an industry leader that is trading at a deep discount to prices seen just a few months ago, but my hands might be tied. The company just announced they are cutting 50% of flights through the end of June. Don’t be surprised if they are forced to cut flights deep into the summer or longer. Will Southwest need to be a part of the government bailout? Maybe, I honestly don’t know and I’m also not sure what kind of stipulations will come as part of such an agreement. No dividends or stock buybacks? That would really impact the investment potential. I’m weighing all these variables, but might pull the trigger soon and sell. I also notice I have allocated too heavily into the travel industry. I did not foresee this kind of crisis impacting so many of the companies I invested in, but I have to play the hand that is dealt. I need to make sure I diversify better so one industry can’t bring me down.

As always, thank you all for reading! This is a strange and difficult time. I invest to make money, not to watch it wash away. Let’s hope the rest of 2020 sees a return to normal and we can all start leaving our houses again. You can follow me on Twitter @TheGarpInvestor.

COVID-19

Fear, agony, depression, anger, and desperation are just a few of the feelings creeping through my mind over the last couple of weeks. As I’m sure you are aware, the market has gone into free fall and the world is in a true state of panic. Coronavirus has spread and brought the world down to its knee. I know things look grim, but as always when investing, it is best to remove emotion from the process. Take a deep breath, go for a walk, whatever you need to do to get yourself into the right mindset.

One mantra I have been repeating over and over is an ancient Persian proverb, This Too Shall Pass. Things look terrible, but the world will one day return to something that resembles normal. In America, we have gotten through the great depression, the financial recession, two world wars, a civil war, four presidential assassinations and once came on the brink of mutually assured nuclear destruction. I have confidence that in time we will overcome and get through this pandemic. We will look back on this as one of those events that we will never forget. This too shall pass.

I don’t say that to minimize the current state of affairs. This is an extremely serious situation that has ramifications felt in all walks of life. Our economy has essentially been put on hold and our most vulnerable citizens are left scared and hopeless. Unfortunately innocent people who did nothing wrong will die. Our hospitals will be strained far beyond capacity. People will lose their jobs and companies previously thought to be impenetrable will fold and go out of business. All we can do is persevere and make the best out of a terrible situation.

Peak to trough, markets have fallen roughly 35%. If your accounts have taken a massive hit, do not feel alone, everyone is suffering. I myself am suffering right along with you. It pains me to my core watching my money wash away. Across the nation, the sense of freedom and security has disappeared in the blink of an eye. Many have lost a significant portion of their retirement savings. I am lucky enough to be somewhat young and hopefully have a long runway ahead of me, but I sympathize with those who don’t. For those who plan to be net buyers of stocks in the coming decades, the only positive way to spin this is knowing that you can now buy stocks today at a 35% discount to what they were just a few weeks ago. I know that doesn’t make it any better, but it is now more important than ever to keep investing.

At some point in the future, there will be a resolution. I don’t know if that will be a month, a year or even many years from now, but eventually we will know where things stand and how the COVID-19 virus played out. In the end, this situation can really only go one of two ways. Either things will ultimately recover and return to normal or our entire world order will collapse and our financial system will turn to ruin. In the first situation, patience and delayed gratification are crucial. In the second, financial assets will cease to matter. Human society will have broken down, so what’s the difference? Who cares what stocks you own or cash you have if the entire system has collapsed? I happen to think the second scenario is incredibly unlikely, but just my 2 cents.

So the question is, how can we make the best out of this awful situation as an investor? Below I have listed 5 actionable steps we can all take.

5 Actionable Steps

Stop Panicking- Easier said than done, but panic provides no benefit. Calm, rational well thought out decision making will always win. Now is the time to start formulating a game plan. Most of us have been quarantined and are stuck at home. You have an abundance of time, make use of it. Take this as an opportunity to learn and grow. Determine what your goals are and how you can reach them.
Give Gratitude- I find myself to be a bit useless at times like these. Other than giving away money, I have no ability to save anyone. I do not have the necessary skills for these kinds of disaster situations. For that reason I find it especially important to be thankful. There are men and women out there on the front lines risking their lives in order to give care to those who fall ill. Thank the doctors, nurses, hospital staff and administrators, emergency responders and anyone else who is out there providing vital relief. They are not the only ones putting themselves at risk however. Thank the cashiers at the grocery store, thank the delivery driver who drops off a package so you don’t have to leave the house, thank the bar and restaurant workers providing you with food to go. There are countless other brave souls out there potentially exposing themselves to the virus, making sure our society continues to function. Thank them!
DO NOT SELL!- The absolute worst thing you can do is to sell out in the middle of a panic. It truly sucks watching your stocks go down every day. I hate it as much as you do, but you never know when the tide will turn. I am not in the game of timing the market. The market will likely recover long before we see the end of the virus. It will turn when sentiment burns bright. I’ll leave it up to Peter Lynch to describe it better than I can. “A stock market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in a panic.”
Look To The Greats- We may not immediately know what some of the best investors out there are currently doing, but we can at least attempt to put ourselves into their shoes. Even better, what would they do if they were in our own shoes? If Warren Buffett wasn’t handicapped by Berkshire’s massive size and the public scrutiny that comes along with all of his decisions, how would he proceed?. I can’t tell you exactly, but I would imagine he would be turning over every rock trying to find the diamond in the rough. He would be looking for great companies with a strong moat, that have fallen to a price far beneath their intrinsic value.
Put Your Research Into Overdrive- As an investor, this is probably the most important step. Everything else you do is all for naught if you don’t put in the work. Populate your watch list, start reading 10Ks and sift through as many balance sheets as you can. As for myself, I plan on taking a look at every company within the S&P 500. I’ve gotten to the point where it only takes me about 30 seconds to know if I might have interest in a company. If I do, more work needs to be done, but otherwise I Just pass on to the next one. After that I’ll start using screeners to help me find smaller companies not located within the S&P. This might feel like a daunting task, but truth be told, you don’t get the reward without the process. When the time comes, you will be ready to pounce.

I know this time is challenging and things are likely to get worse, but remember This Too Shall Pass

Thanks for reading. I’ll be back sometime next week to give you my Q1 portfolio update. Sneak Peak: It’s bad! You can follow me on Twitter @TheGarpInvestor.

Credit Card Points

This blog has been almost entirely devoted to investing into the equity markets. As investing is merely one of my passions, I figured I should write up a post about one of my others: Credit Card Points. These points have allowed me to travel the world, while saving tons of money. I have not paid for a single flight in about 5 years, taking roughly 4 round trip flights a year.

Before I get started, let me lay a few ground rules. Credit cards can be incredibly dangerous. Compound interest works against you just as easily it can work for you. In fact, probably more so. The banks charge interest well into the 20% range. I know of very few investors capable of compounding at that rate. If you let the debt start flowing, it will never stop.

3 Cardinal Rules

Do not use credit cards if you cannot afford to pay off the the monthly balance each and every month.
Pay your bills on time!
Do not start spending extra money just to get additional points.

If you can follow these rules, you can use credit cards to your advantage. The banks that partner with the cards offer some incredible perks. These perks are offered because they know a certain percentage of people will fall into their trap; miss a payment and they can start charging crazy amounts of interest and fees.

This allows people like me to take advantage. By making sure I follow the rules, I can get all of the perks without any of the negative repercussions. Over the last 5 years I have accumulated well over a million points. Conservatively valued, a credit card point is equivalent to a penny. In reality, you can do a fair bit better than that, but based on that exchange rate I have earned over $10,000.00.

The most important perk is the sign up bonus. There are a number of cards which will give you something in the range of a 60K+ sign up bonus if you spend at least $3,000.00 within the first 3 months. Each card differs slightly, but this is the gist of it. For those with expensive tastes, $3,000 is rather easy to hit. For others, there are ways of getting up to the spending limit without taking on unnecessary luxuries. For instance, you can often prepay things like cell phone, cable and utility bills. They will keep a credit on your account. You have only altered the timing of the spending, not the amount.

As I try and limit my personal spending, I have been forced to be creative to get these bonuses. I am fortunate enough to run a business that allows me to open up additional cards and reach spending limits. Business expenses tend to add up rather quickly, so if you are able to put these expenses on a card it has a two pronged positive impact. Most importantly, you get the all important points we have been talking about. A second more nuanced benefit is being able to delay payment. Say you make a purchase in mid January. This will get put on the end of month January bill that will likely not need payment until the end of February. You’ve essentially just been given a 45 day interest free loan from the credit card lender. Awfully, kind of them. This can really improve a company’s cash flow situation, just make sure the bills are being paid. Use this to your advantage, don’t be tricked into paying interest.

I’ll give a shining example from the last couple of months, this has been my crowning achievement so I am rather proud of myself. At a property my family owns, we had a large expected repair to something called a sewage ejector pump . Don’t want to bore you all to death with all the details, but long story short we owed about $16,000.00. We have the money in our account, we are in no danger of defaulting on a payment, so why not put the money on a card? I called up the company and they informed me they would in fact accept payment with a CC. You can’t get what you don’t ask for.

Knowing that we had such a large expense coming up, I decided to open a new card. I went with the Chase Ink Business Preferred. The beauty of this card is the 80,000 point bonus. The caveat is you have to spend $5,000 in the first 3 months. $5,000 is a fair amount of money to spend that quickly, but perfect for just this kind of situation. I called in and put the expense on my card, earning me a quick 96,000 points. 80,000 for the sign up bonus and the usual 16,000 points earned for every dollar spent. The fun doesn’t end there however, I had another ace up my sleeve. Because I already owned the Chase Ink Business Preferred in the name of another one of our LLC’s, I was able to refer myself one company to the other. This gave me an additional 20,000 points for doing virtually nothing.

That’s right, I just got 116,000 points on a single transaction. A transaction we had to pay for no matter what. I also got to delay our payment by about a month and a half, improving our cash flow situation. I’m not sure the stars will aver align that perfectly again, but you never know. I am now sitting on a tad over 250,000 points. Part of the game is figuring out how to extract the most value out of them. Manipulating the system and how best to transfer points to travel partners is a discussion for another day, but know that these points will be put to good use. If you have any travel recommendations, send them my way.

As usual thanks for reading! This was a bit of a change up from my regular programming, but hope you got something out of it. I’m happy to try and answer any questions. Feel free to follow me on Twitter @Thegarpinvestor.

Happy New Year!

Happy new year everyone! 2019 has ended and a new chapter is about to unfold. A new year is always exciting, but a new decade brings on a whole new level of anticipation. A blank slate just waiting to be built upon. Should you not have taken advantage of the last decade of investment gains, fear not. Is the market overpriced now and ready for a downturn? Perhaps, but not necessarily. Time in the market, beats timing the market every time. So let’s all just make a commitment to putting some money aside and investing each and every month. There is no time like the present, so just do it!

2019 Performance

As of 1/1/2020, my 10K portfolio stood at $11,816.42. When I started on 8/19/18, the SPY had a price of $285.06 and obviously my account started with $10,000. As of 1/1/2020 the SPY had a price of $321.86. In reality, the SPY has done even better due to dividends, so I have accounted for dividend reinvestment in the return calculations.

10K Return(1) SPY Return(2) Difference(1-2)

2018(8/19-12/31) 13.95 13.71 .24

2019 37.33 32.6 4.73

Since Inception(8/19/18) 18.16 15.09 3.07

So far, my investment results have been satisfactory. I haven’t crushed the market by any means, but a few points of outperformance are always nice. Compounded over decades, a few points will make you incredibly rich. For now, I am on the right track. Before I get too proud however, I have only been running this portfolio for a year and change. Let’s see if I am still ahead 5, 10 and 20 years from now. Fingers crossed.

Robin Hood

2019 brought along a welcome change to investing to the investing world. The major brokerage houses all lowered their trading commissions down to 0. This is a real boon, no longer do we have to worry about transactions eating into our returns. This was actually just a continuation of the multi decade brokerage race to zero fees. My dad reminds me of the days when a broker would charge a percentage of the total purchase. Imagine having a million dollar transaction(must be nice) and having to pay 20 or 30 grand just to buy or sell.

Given that I have no allegiance to Robin Hood, I am going to move my account over to TD Ameritrade. I don’t particularly like how Robin Hood displays account information, it isn’t easy to determine how individual stocks have performed using their interface. Robin Hood charges a $75 fee to move an account, so I gave TD a call and they are willing to cover the fee for me. The lesson here is that these brokerage firms are eager for your assets, use your leverage to negotiate.

Current Portfolio

Here is an updated look at my portfolio as of 12/31/19

Annotation 2020-01-06 122134

As you can see, my portfolio weightings have started to take shape. Some positions have become quite large, while others now take up a smaller portion. For the most part, this wasn’t due to putting much more money into one vs another. I invested a similar amount into most of my companies, within a couple hundred dollars. The difference has rather come from those investments performing well. It is no coincidence that Floor & Decor is now my largest holding at 15.05%. I originally put $1,137.10 into FND, it is now worth $1,778.35, up 56.4%. If only all my investments could perform that well, alas I am not that lucky.

I also still hold a little over a 5% cash balance. I always like to keep at least a little ammo in my pocket should I see a good opportunity. That being said, I like to be almost entirely invested. You can’t compound with money sitting on the sidelines. I trust that the companies I have chosen will make good decisions. Should the market take a fall, they all generate lots of cash to use opportunistically. Whether that is buying back stock when the market price is lower than the intrinsic value of the company, or making an acquisition at a bargain price, I feel confident. I am far more interested in finding the right company than finding the right price.

As always thanks for reading, I appreciate it! I hope you all had a happy new year and let us all make 2020 a good one. Please subscribe and don’t forget to keep on compounding.

Goodbye Summer (Q3 Update)

Unfortunately, all good things must come to an end. Summer came and went in the blink of an eye. Labor day weekend is now well behind us and so are any hopes I once had of not gaining a good 15 lbs over the Summer. A couple of trips and way too many burgers and beers are probably the primary culprits. I hope you all got to enjoy the summer heat as much as I did.

September however brings a new level of excitement. Kids are back in school and if they are forced to learn, we should be as well. We are all mere students of the game and therefore we need to work on our investing practice. A day doesn’t go by where you cannot learn something, so seize hold of the opportunity. A little bit of knowledge every day, will turn into a mountain of information over a lifetime. With that out of the way, let’s check in and see how I did this quarter.

Q3 Performance

As of 9/1/2019, my 10K portfolio stood at $11,088.12. When I started on 8/19/18, the SPY had a price of $285.06. As of 9/1/19 the SPY closed at $292.37(it’s actually had quite a run up since.)

Return(1) SPY Return(2) Difference(1-2)

Portfolio value $11,088.12: 10.88 2.56 8.32

With dividends reinvested into the SPY their returns would look a bit more like this.

Return(1) SPY Return(2) Difference(1-2)

Portfolio value $11,088.12: 10.88 4.42 6.46

I have to say that I am more than satisfied with my results thus far. I have cut a few of my losers and held tight onto my winners. I like to let my winners ride and let compounding do the work. Some might be overvalued and others are hopefully undervalued. In the long run, stocks will follow suit with growth in intrinsic value. I feel good about the companies I’m invested in and their prospects for the future. That being said, I hold onto almost $1,700 in cash. I am finding it hard to find deals I am comfortable with in the current environment. That doesn’t mean the search is over, just means I have to turn over more stones. One will appear and I will be ready to put my remaining capital to work.

Taxes

One topic I don’t see talked about nearly enough is the effect of taxes on investment returns. So often I hear analysts talk about a stock hitting their price target, meaning it is now a sell. Too often, these recommendations fail to mention taxes. Should you have a good gain, the second you initiate that sale, your gain is now realized. You will now be responsible for the taxes. Let’s just look at a simple example. Say you bought company A at $100. You made a great pick and after 6 months, the stock has now doubled to $200. Obviously you have made a fantastic investment, the question is what do next? If you sell out entirely, you will have a gain of $100 and it will be considered a short term capital gain, as you have not held it for longer than a year. It will be taxed at your normal income tax bracket. As of now, these taxes will fall somewhere between 10% and 37%. Let’s just assume a middle tax bracket of 24%.

On the $100 gain you will have to pay $24, leaving you with $176 to work with. Additionally, depending on where you live, you will owe state and local tax. Here in Baltimore County, Maryland you owe 5.75% to the state and 2.83% to the county. This lops off another $8.58, bringing that initial $200 down to $167.42.

The variables are of course ever changing. Should the characteristics of company A fail to live up to expectations or should your investment thesis no longer hold true, it very well might be a good time to sell out and switch companies. The important lesson is to take the effects of taxes into consideration and make an apples to apples comparison. In this example it is not $200 in Company A vs $200 in Company B, but instead $200 in Company A vs $167.42 in Company B. With that in mind, selling out of Company A might not be as enticing.

As always, thank you for reading. Be sure to subscribe and follow me on Twitter @Thegarpinvestor. Feel free to share the post, thanks!

One Year Down

I have now officially been running this blog for a full year now. I’ve had my ups and my downs, but I think I’ve grown considerably as an investor. I truly think I am better than when I started and I am now even more committed to GARP investing. Putting my thoughts out in public has forced me to focus on my core beliefs and has held me accountable. I expect my growth in year 2 to be even greater than in year 1. Just like wealth, knowledge is always compounding.

Year One performance

I started this journey exactly one year ago. I put $10,000.00 of my own money into my 10K Portfolio. I put that money into companies I believed in and let them do the work for me. Thankfully, I didn’t fall flat on my face and I’ve been able to make some money. My portfolio now stands at $10,843.11. As I often state, making a positive return isn’t all that difficult. You can buy government bonds and make a virtually risk free return, it just won’t be very good. I choose to compare my portfolio to the S&P 500. If you can’t outperform the general American index in the long run, you don’t have much business in picking individual stocks. When I started on 8/19/18, the SPY stood at $285.06. As of 8/19/19 the SPY closed at $292.33.

Return(1) SPY Return(2) Difference(1-2)

Portfolio value $10,843.11: 8.43 2.55 5.88

Simply looking at the SPY ticker isn’t quite fair to the index. My portfolio value accounts for all dividends I have collected over the last year. The SPY does not automatically reinvest dividends. They currently give out a yield of 1.86%. Without knowing the exact days of distribution and all that jazz, I think it is easiest if I just add in 1.86% to the SPY return in order to give a more accurate picture. Therefore a more realistic result would be as follows:

Return(1) SPY Return(2) Difference(1-2)

Portfolio value $10,843.11: 8.43 4.41 4.02

Overall, I am pretty satisfied with my results in year one. I outperformed the SPY by a hair over 4%. Take this with a grain of salt, one year is not nearly enough time to get an accurate picture. It will likely take at least 3 years to really tell whether this out performance is for real. That being said, I certainly prefer to have this head start.

Mistakes Made

I have learned a number of lessons since starting this blog. Some were completely new to me, while other things I knew but needed to be reinforced. My first punch to the gut came shortly after beginning. I rushed into some companies, rather than waiting for an appropriate entry price. Soon after I bought into my first companies, the market took a precipitous fall. Had I just bought in a couple of months later, my returns would likely be higher by a good 10%. The biggest lesson I learned was not to fight against a large macroeconomic situation. I grossly underestimated both how much effect the trade war could impact my companies and how long such a situation could last. I thought we were looking at a blip on the radar and my companies would return to form in just a couple of months. I was wrong. This trade war has lasted far longer than I had anticipated and has greatly lowered the earning power of some of my companies. I don’t think the end is in sight and for that reason I have chosen to make some changes to my portfolio. I still believe in these companies, in the long run I would bet that all will end up fine. However, I must stick to my principles as a GARP investor and therefore I choose to invest in the path of growth, not turnaround situations.

Portfolio Changes

Within the last month, I have cut out my positions in HII, IPGP, and LEA. As I stated, all are fine companies. They simply haven’t been able to whether this trade war without suffering. Each has seen their earning power eroded greatly and the stocks have followed suit. Unfortunately, I lost money on all three of these investments. Thankfully, some of my winners have more than made up for it. In fact, my investment into FND alone has made up all losses in these three companies. With the money from selling, I bought one additional share of FB for $180.17. I now sit on a cash balance of $1,688.44. I have a number of companies on my watch list that I am following and I will be waiting for a good time to enter into two or three new positions. I’ll be sure to let you know when that happens.

As always, thank you for reading. I have appreciated your support over the last year and look forward to seeing where this journey takes me. Be sure to subscribe and follow me on Twitter @Thegarpinvestor. Feel free to share the post, thanks!

Blogging Is Hard (Q2 Update)

I hope everyone has gotten to enjoy the long holiday weekend. This time of year, we get to celebrate America and appreciate all the freedoms we are given. On the investing front, we should acknowledge how fortunate we are to invest in a country that has provided long term annual market returns of 8-10%. If you can just keep up with the market over the long run, you’ll end up pretty well off.

Just like the market though, running a blog has its ups and its downs. Sometimes you feel the jolt of inspiration, a never ending flow of thoughts simmering at the surface just waiting to be written down. At others, writing a post can seem like the greatest hassle in the world. Recently, writing for the blog has frankly been a challenge. This is my first post in three months, since my last portfolio update. What starts as a one week lapse, quickly turns into two, which inevitably carries on for many more. Just like investing, the weeks tend to compound.

It isn’t like I haven’t had any good ideas, I just haven’t been able to muster the energy to sit down and write out a full post. The year 2019 gives us a never ending supply of distractions, whether it was watching the NBA Playoffs or browsing through Reddit and Twitter, I always found something inconsequential to occupy my time. I can now say I understand how a famous author can keep fans waiting year after year without ever finishing a series(well maybe I don’t understand the whole having fans part). George RR Martin, you have my sympathy.

On the financial side of things, 2019 never ceases to surprise. After a calamitous end to 2018, 2019 started the year sprinting out of the gate. By the end of the the first quarter, I was sure the market had to give some back. Instead the market has continued its steady onward march. Luckily for me, my portfolio has been fully invested and my companies have continued to grow. I’m not however ready to be too confident. The bottom could fall out at any moment, so who knows what will happen, I’m just along for the ride.

2nd Quarter Performance 2019

Reminder my 10K Portfolio started with $10,000 on and was bench marked against the SPY at 285.06 which as of the open on 7/1/19 stood at 293.

Return(1) SPY Return(2) Difference(1-2)

Portfolio value $10,620.89: 6.93 2.78 4.14

My portfolio has continued to do well and I now outpace the SPY by over 4%. Let’s not get too ahead of ourselves, I am still shy of the 1 year anniversary of the portfolio. I’ll chalk this up to luck, but if I can still be beating the market 5 years from now, I’d like some credit! I am unlucky and perhaps a bit stupid for when I started the portfolio. Had I waited just a few months, that nearly 7% return would easily be double that amount.

More important than the stock returns however, the performance of my portfolio companies have been quite good. Let’s take a look at what’s been going on.

Best Performers

MSFT- Under Satya Nadella’s leadership, Microsoft continues to dominate. They may have taken a break from growth in the early 2010’s, but they are back and hungrier than ever. You would think that a company with a market cap over 1 trillion would have trouble growing. Right now, that couldn’t be further from the truth. This past quarter, MSFT grew operating income by 25% and diluted EPS was up 20%(both YoY). Buoyed by their cloud division, Azure, Microsoft’s dominance looks inevitable. Azure had revenue growth of 73% compared to last year. The company also now sits on a treasure chest of 131 billion dollars of cash and short term investments. Their balance sheet is rock solid and they are well positioned for years to come.

ODFL- Old Dominion Freight Line is much smaller than Microsoft, but their recent success is no less impressive. This past quarter they were able to grow EPS 23.3%, while also reducing the overall share count by 1.5%. It is almost always a good sight when you see EPS growing rapidly and the overall share count falling. You can get in trouble if the company is paying a price well above intrinsic value for those shares, but I do not believe this to be such a case. I now own a greater percentage of a company that is performing excellently. Debt levels remain almost nonexistent and I feel comfortable holding onto this company well into the future. I am down about 7% in the company even though the market has gone up and the company has performed extremely well. This is probably a pretty good indicator that ODFL is trading at an attractive price.

Worst Performers

LEA- Unfortunately, not all of my companies have been great performers. Lear Corporation has had a couple of bad quarters in a row and my holdings are now down almost 20% in the company. Sales were down 5% and adjusted EPS fell from 5.1 to 4. These are never good signs, I like to see companies going in the opposite direction. GARP investing is about finding growth, not watching sales fall. Lear is being impacted by the cyclical nature of automotive sales. We seem to have hit a peak and auto sales have fallen in recent quarters. On the bright side, the company continues to drive down the share count. On a P/E basis the company looks pretty cheap, trading around 8.5 but that isn’t necessarily a good enough reason to hold onto the company.

HII – Unlike Lear, Huntington Ingalls was able to grow revenue, up 11% YoY. It wasn’t all good however, operating income fell from 191 million to 161 million. This was primarily due to lower margins and how penchant expenses are accounted for. Either way, earnings were down considerably. The company also took on a substantial amount of debt and the balance sheet doesn’t look nearly as strong as it used to. Not all is bad though, HII did win some crucial contracts and the backlog now stands at a record 41 billion. The company remains a high moat competitor with long term contracts locked in. I just have to wonder if this is the best investment opportunity available.

For the time being I am going to hold onto these companies and monitor how they do in the next quarter or two. Should things not improve, don’t be surprised if I sell out of one or even both of these. I like the future prospects of HII more at the moment, but they still need to be paid close attention. I don’t care how much a stock moves in the short run, if the business doesn’t perform up to expectations it may be time to move on. I would rather put my money into a company with better industry tailwinds.

As always thanks for reading, I appreciate it! Be sure to subscribe to this blog and follow me on twitter @TheGarpInvestor.